Market Commentaries & Technical Analysis as at 15 Nov 2009

Investment Theme For 2009
*** UNCERTAIN ***
1. Privatization And M&As Deals
2. A Stronger Ringgit Policy
3. Implementation Of the Ninth Malaysia Plan
4. Asset Reflation Theme
5. Eastern Corridor Development Programme (Petronas-Led)
6. Northern Corridor Economic Region
7. Sarawak Region Corridor
8. The Sabah Development Corridor
9. The Asia Petroleum Hub In Johor
10. The Solid Waste Management Play
11. Flow of OPEC Petrodollars
12. The Trans-Peninsula Pipe Project
*** UNCERTAIN ***

13. Sarawak Corridor Of Renewable Energy (SCORE)
14. Iskander Development Region (IDR) In South Johor
15. RM40 Billion Public Transport Expenditure
16. Water & Water-Related Play
17. A U-, V-, W- Or L-Shaped Global Economic Recovery
18. Fiscal & Monetary Pump-Priming & Normalization Of Corporate Earnings
19. The Economic Stabilization Plan, Mini Budget & Budget 2010
20. Interest Rate Cycle (End Of Easing Cycle As Economy Recover)
21. Decoupling – Emerging Economies Is Disconnected From Developed Countries (Uncertain)
22. Liberalization Of The Services/Financial Sector
23. The Malaysian Government’s Reform “Train”
24. GLCs Revamp
25. The ‘Third’ Link Bridge (Eastern Johor) To Singapore (Uncertain)
26. A ‘Third Stimulus’ Package (Uncertain)
27. Second Wave Privatization 1.0

Watch List In The Coming Week
1. Mega Project Calls For Tenders And Awards (LCCT, LRT extension);
2. Upcoming Maxis IPO (19th Nov 2009); MAXIS Will Be Included As One Of The 30
constituents In FBM KLCI From Nov 20, 2009, The Second Day Of Trading;
3. More Construction Contracts, O&G Projects& Liberalization Measures Of The Services
Industry

Market Commentaries
This week the FBM KLCI is likely to rise in anticipation of MAXIS Bhd’s listing.

Sentiment will be positive ahead of MAXIS’s listing, which will be one of the key development of the week. MAXIS will be included as one of the 30 constituents in the FBM KLCI from Nov 20, 2009, the second day of trading.

The results season will progress as usual. Good figures are already expected, so the boost from them may not be that great.

Also there is talk that the earthworks contract for the LCCT terminal may be issued this week. If that happens, the winner will certainly benefit.

SPNB had also launched the pre-qualification tender for the civil works of the LRT extension project on Nov 3, 2009, a month later than scheduled. It has yet to invite bids for the systems and rolling stock option, which is being eyed by international as well as local companies. When it does, the bidding is expected to be intense for the under utilised Ampang Line.

Things will look up for the whole construction sector as well with the resumption of news flow.

Meanwhile, liquidity in the local stock market has been partially sapped by the upcoming listing MAXIS, which is placing out an estimated Rm11.7 billion worth of shares. A sizeable portion of local funds is tied up to subscribe for the impending IPO of the MAXIS. Money is also flowing out of other local blue chips, either to subscribe for the MAXIS IPO or to purchase shares listed abroad.

Some positive development in the local stock market is that overseas investors were net buyers of Malaysian stocks in September 2009 for a second straight month as they sought shelter in “low-beta safe haven” markets to avoid global volatility.

Foreign funds bought US$45 million of Malaysian shares in Sept 2009 after a net inflow of $87 million in August 2009. In July 2009, there was an outflow of US$121 million.

The net inflow “signals investors’ preference for safety as global markets were volatile in the August and September 2009 period. For October 2009, “there is a good chance that foreigners will remain net buyers given the strong performance by banking and plantation stocks so far.

Foreign funds boosted their holdings in palm oil producer IOI Corp, casino operator Genting Bhd and Public Bank Bhd.
****************************
More exciting events were the unveiling of the proposed routes for the LRT line extension to Puchong and Subang, the draft prospectus for Maxis’ upcoming IPO and the placement by Khazanah Nasional Bhd of some stakes in its subsidiaries and the upcoming National Automotive Policy (NAP).

There could be a slew of positive news flow, including more construction contracts, oil and gas projects and liberalisation measures of the services industry.

The good news is that there is very little foreign participation in the market now (Oct 2009). If they return for whatever reason, it would give the stock market a badly needed boost.

While the media reported rumours that the 10th Malaysia Plan (10MP) may see a cut in development spending of 10% to RM180 billion for 2011 to 2015 compared with RM200 billion for the 9MP to allow the government to trim its budget deficit to 4% by 2015, this cut should be compensated by the carrying forward of unutilised allocation from the 9MP and that the government may step up incentives for greater private sector participation such as through PFIs or financial guarantees.

An example is the proposed permanent low-cost carrier terminal (LCCT) which will be funded by Malaysia Airports Holdings (MAHB) rather than directly by the government.

In any case, expecting a number of mega projects to be awarded over the next 12 months (Sept 2009 – Sept 2010) in the final year of the 9MP while a sizeable oil and gas project could be announced before year-end (2009).

The Risks …

The current (Nov 2009) disconnect and divergence between the direction of equity markets and macro economic cycles may be pointing towards an easing in risk appetite — even as the pace of the global economic recovery continues unabatedly in the coming quarters (4Q2009 & Beyond).

External macro economic data released in recent days were indeed solid, with the United States’ ISM manufacturing index strengthening to a three-and-a-half-year high of 55.7 in October, suggesting that gross domestic product (GDP) growth in the fourth quarter of 2009 (4Q09) should at least keep pace with the 3.5% in 3Q09.

PMI reading for the European Union expanded to 50.7 in October 2009 as well — the first expansion in 17 months, while China’s economy accelerated further in October 2009, with its PMI rising to 55.2.

Nonetheless, risk appetite would ease as interest rate expectations escalated. With macro economic cycles having negotiated past a trough, growth concern is not the residual drag on markets.

As macro economic data continues to outpace expectations, the primary concern is shifting to — whether this ongoing recovery in the global economy, along with continued increases in prices of commodities — will prompt central banks around the world to embark on a tightening interest rate cycle.

Any tightening would put an end to a net liquidity creation that had been feeding a market rally for the most part of 2009. There were nascent signs that other countries would soon follow Reserve Bank of Australia in raising rates.

Trading conditions are likely to be very volatile in 4Q09 as markets start to assimilate expectations of an upturn in global interest rates sooner than had previously anticipated.

Market has to discount rate hikes before trending higher. In the immediate months ahead (Nov 2009 & Beyond), expecting to see tactical weaknesses in the market — as interest rate expectation supersedes macro cycles — in dictating direction of the market.

Meanwhile the outlook for regional markets in the final quarter of 2009 is hazy, with uncertainties still loom over the global economy.

The excitement created in the markets by the ample liquidity pumped into global financial systems could evaporate if the stimulus plans fell short of their objectives.

It would be a “wait-and-see” period, while the third quarter 2009 ended on a fairly positive note for most markets on confidence boosted by some of the data coming out of the US, this might not be the case going forward.

It was important to view the markets in the context of some of the economic stimulus packages coming to expiration.

Investors have to see if the expiration of the stimulus packages would result in a pullback in the markets.

Investors would tread water and the markets will move sideways until more definitive data comes out from the US.If investors and consumers retreated in a major way should the US economy, in particular, not fully recover, it would have serious repercussions on global equity markets.

Compared to the first half of the year (2009), there appeared to be a slight slowdown in the uptrend of the local bourse. Part of the reason was that the valuations in the FBM KLCI were now (Oct 2009) rather high. The most common feedback or comment about Malaysia is that the market is not cheap (Oct 2009). In fact, it has been an expensive market and will remain so in the near to medium term.

The market will continue to be supported by the considerable pool of liquidity that is largely trapped in the system. Although most of the capital controls have been lifted, the country’s capital outflow remained slow. Surpluses are mostly trapped in the system, especially since the imposition of capital control in September 1998

Also, the index was more reliant on the financial sector, given that commodity prices had fallen and thus affecting plantation stocks. For the market to pick up steam, there must be rotational play and, for that to happen, commodity prices have to recover.

Another reason why participation in the local market had been lukewarm of late was the government’s plan to cut spending, a move that would dampen the outlook for infrastructure and construction players.

We need a new catalyst, perhaps a recovery in commodity prices, but the conditions that permit that are not here.

As far as the domestic stock market is concerned, it has been local funds that have kept it up, given the lack of foreign fund participation. There would invariably be a lull in the local market when foreign funds moved their investments to other exchanges that they perceived as doing better, and vice-versa.

The fortunes of the regional stock markets now (Nov 2009) lay with global issues, an important factor was how economies and consumers would respond when the fiscal stimulus measures adopted by countries like the US came to an end.

How will the governments replenish when the cash runs out? You will have to find the money first, and during that period if the consumers or investors pull back, then the markets will suffer. An economic recovery based on government stimulus alone would not last as once the stimulus expired, the economy would slump again.

However, despite the mid- to long-term uncertainties, the equity market remained in a “sweet spot” for now (Nov 2009), driven by abundant liquidity, economic and profit recoveries, easing credit policies and a low inflationary environment.

The US Equities Market …
The U.S. economy grew in the third quarter 2009 for the first time in more than a year as government stimulus helped lift consumer spending and home building, fueling an unexpectedly strong advance.

Signaling the end of the worst recession in 70 years, the Commerce Department said the economy expanded at an annual rate of 3.5 percent in the July-September 2009 period, snapping four down quarters with its fastest growth pace since the third quarter of 2007.

It raised hopes for further improvement in corporate profits. Prices for U.S. government debt and the U.S. dollar fell as traders exited safe havens.

The economy has emerged with gusto from the deepest recession since World War Two.

Growth was fairly broad-based with solid gains in consumer spending, exports and home construction. But it was also driven by emergency government programs like the popular "cash for clunkers" incentive for new auto purchases and an US$8,000 tax credit for first-time home buyers.

The auto discount program ended in August 2009 and the home tax credit is due to expire next month (Nov 2009), although Congress is working on a plan to extend it.

Stripping out auto output, the economy would have expanded at only a 1.9 percent rate in the third quarter 2009. In the absence of government support, there are fears the brisk growth pace will not extend into coming quarters (Nov 2009 & Beyond), with rampant unemployment also inflicting damage.

The economy is entirely dependent on federal deficit spending at the moment. But the stimulus will not fade right away ... that means solid growth continuing through the first quarter of next year (2010)..Once the government steps aside, growth is likely to fall back to a 1 to 2 percent rate of growth.

The United States is entering recovery following in the footsteps of major economies like China and the euro zone.

4Q2009 & Beyond …
Before 2009 comes to a close, there could be a surge in volatility in the financial markets as investors become nervous about the global economic picture.

At the moment (Oct 2009), investors are very short term focused, looking at the earnings seasons. But strong earnings may not last.

The momentum in corporate earnings sales and revenues of global companies could start to be disappointing again at the beginning of 2010 due to the effects if a sluggish economic recovery and that could weigh down global stocks. We are not immune to a market correction in the coming months (Oct 2009 & Beyond). The bigger the market rally, the bigger will be the market correction.

In the US, 4Q2009 corporate earnings results could be challenging and 2010’s earnings forecasts are looking a bit too ambitious, because a lot of the economic stimulus measures implemented by the US government earlier 2009 would be wearing off. In addition, there is a little bit more strain on US consumers due to high employment. Upside for US stocks could be more challenging in 4Q2009 and 1Q2009 because the engine for growth may slow down a little. There will be more volatility coming (Oct 2009 & Beyond).

The prospects for emerging market stocks in the months ahead (Oct 2009) still look bright compared with developed market stocks. The emerging market story is now (Oct 2009) more of an earnings story than a valuation story. There is a fair degree of confidence that earnings will be more robust in emerging markets.

Earnings will revised by a larger extent in emerging markets than developed markets. So, valuations for emerging equities cam get cheaper than current levels (Oct 2009) … on earnings upgrades.

Going forward, the valuations of emerging markets and developed markets could narrow and a valuation equilibrium may arise as these markets become integrated from an earnings growth perspective.

People historically expected a discount for emerging markets stocks. But they should not expect a discount in the future because developed markets and emerging markets do not look that dissimilar from a corporate governance prospective.

In terms of attractiveness of commodities, the rebound in commodity prices from their oversold levels is already done. It was driven by the sharp increase in Chinese exports. Since we believed the economic recovery will remain relatively sluggish for the coming 12 months, it is believed that China is not going to import on a large scale.

On top of that, the US dollar which has been under tremendous selling pressure since Sept – Oct 2009, it will rebound in 2010 because the greenback is clearly undervalued. And, a tactical rebound in the US dollar could weigh down prices of commodities, especially gold.

Technical Analysis
The oscillator per cent K and the oscillator per cent D of the daily slow-stochastic momentum index continued to weaken after flashing a short-term sell at the top on Tuesday.

The past week saw the 14-day relative strength index retracing from a reading of 78 points on Tuesday to the 60 points level yesterday.

A day after flashing the buy signal in mid-week, the daily moving average convergence/divergence (MACD) histogram went under the daily trigger line once again on Thursday due to lack of support.

Weekly indicators were deteriorating, with the weekly slow-stochastic momentum index moving out of the bullish zone and the weekly MACD on the verge of falling below the daily trigger line.

Bursa Malaysia scaled to a near 18-month high of 1,279.52 in mid-week before turning range-bound on bargain-hunting interest alternated with profit-taking activity.

In line with expectation, the FBM KLCI had a futile effort to breach the relatively strong overhead resistance of 1,280 points on the first attempt but investors should not be too concern, as the bulls are likely to overcome that hurdle eventually due to a combination of positive factors which augurs well for equities.

Firstly, the global economy is on the mend, albeit a little bumpy. Secondly, the underlying tone of the overall market remains solid, judging by the volumes transacted in recent days.

With Maxis Bhd coming on board this week and driving liquidity to a greater level, the trend going forward appears promising, compounded by a traditional year-end (2009) “window-dressing” activity. Therefore, any retracement in the immediate term due to overbought reason is interpreted as an opportunity to accumulate.

Technically, indicators suggest another round of correction is on the cards, which is likely to be brief and shallow, with the 21-day simple moving average (SMA) and the 14-day SMA, resting at 1,259 and 1,257 points acting as initial support. Important floor is pegged at 1,232, also the 50-day SMA.

Heavy overhead resistance barriers remain at 1,280 points, 1,300-1,305-point band, followed by the 1,332 points.

Undermining Factors
1. Fear, Uncertainties, Global Liquidity Crunch & Economic Fallout (Stabilizing);
2. Volatile Foreign Exchange Market;
3. State Of The Global Economy (Rate Of Decline Has Started To Moderate Since March 2009
With Strong Signs Of Recovering);
4. Commodities Prices (Strengthening Especially Oil, Gold & Silver);
5. A Global Deflationary Threat -> Hints Of Recovery – Fear Of Inflation;
6. Threats Of High Commodities Prices And US Dollar Crisis;
7. Tightening Of Global Monetary Policy Unwinding Of US Dollar Carry Trade

Unpredictable Risks/Surprises
1. Terrorist Attack –
2. Oil Supply Disruptions –
3. A Pandemic Disease – Swine Flu
4. Major Social And Geopolitical Upheaval –

Equity Strategy: Easing Malaysia Political Uncertainty, Outcome Of The Credit Crunch And Subprime Loans Crisis Stabilizing, Strengthening Commodities Prices, Stable Global Growth, Moderating Inflation, Easing Monetary Policy & Fiscal Stimulus Measures … Second Stage Global Economic Recovery!

Recession – Recovery – Growth – Boom – Burst

(With Global Valuations Fair To Approaching Expensive, Investors Should Begin Shifting Focus To Corporate Earnings)

a. State Of The US (Jobless Recovery), Japan (Recovering Stage) & China (Gaining Momentum)
Economy as at Oct 2009
b. Shifting Focus From Economic Growth Surprises (which drove upgrades to earnings and
valuations) To Other Factors To Drive (or protect) Returns Going Into 2010. (Latest)
c. Global Equities Outlook …
d. Global Monetary & Fiscal Policy (The Exit Strategy): Recovering Economy, Weakening US
Dollar, High Commodity Prices & Inflation Expectations Building Up
e. The US Equities Market: A Bubble Is In The Forming
f. The Malaysian Equities Outlook: 5 (Optimistic), 7 (Neutral), 6 (Pessimistic)

a. State Of The US (Jobless Recovery), Japan (Recovering Stage) & China (Gaining Momentum) Economy as at Oct 2009

The US Economy …

By Treasury Secretary Timothy Geithner … Nov 2009

He acknowledges the federal budget deficit is too high, but that the priorities now (Nov 2009) are economic growth and job creation.

Geithner avoided giving specifics on tax hike. President Barack Obama is committed to dealing with the deficit in a way that will not add to the tax burden of people making less than $250,000 a year. The White House has not decided how to reduce the red ink.

Right now (Nov 2009) they are focusing on getting growth back on track.

He acknowledged that the economic recovery, while showing positive movement, has been shaky and uneven. A lot of damage was caused by this crisis. It's going to take some time to grow out of this. It could be a little choppy. It could be uneven. And it's going to take awhile.

A bright spot in the recovery identified by Geithner is the banking system, which he said is "dramatically more stable" because of the government bailout.

Even though 115 banks have failed so far 2009, there has been a "dramatic improvement in confidence," with private capital back in the system. Large businesses are now (Nov 2009) able to borrow again. The banking system is dramatically more stable than it was three months ago, six months ago, nine months ago, a year ago (2008).

But more needs to be done to assist small businesses, adding that the administration is working to help open up credit to them. These businesses, "face a really tough environment on the financing side."

After financial institutions were widely blamed for assuming too much risk and bringing the economy to the brink of collapse, a concern now (Nov 2009) is that they might end up being too timid. The big risk US face now (Nov 2009) is that banks are going to overcorrect and not take enough risk.

The US economy needs them to take a chance again on the American economy. That's going to be important to recovery.

Due to the growing unemployment rate, the president's economic stimulus program has done nothing but increase the size of government. Businesses are "sitting on their hands" because of government spending and proposals for health care and other initiatives would increase taxes.

Business people are afraid to invest in their business, afraid to grow their business, because they don't know what's going to happen next.

Geithner acknowledged the economy remains tough for many workers who have lost jobs and it's going to be some time before the employment outlook starts to brighten for many of them.

Unemployment is worse than almost everybody expected. But growth is back a little more quickly, a little stronger than people thought. Unemployment hit a 26-year high of 9.8 percent in September 2009, and the October 2009 could show it topping 10 percent. It's likely still rising. And it's probably going to rise further before it starts to come down again.

It is too early to decide if a second government stimulus package should be offered, though he acknowledged unemployment probably will rise even more before it starts to turn around.

Economists expect to see job growth after the first of the year, probably in the first quarter 2010.

You're not going to see real recovery until it's led by the private sector, by businesses.

With about half of the stimulus money left, along with tax cuts and investments ahead, "there's a lot of force still moving its way through the system now (Nov 2009)" and that will keep providing economic support.

Geithner also said the administration supports steps being considered by Congress like extending unemployment insurance benefits and the tax credit for first-time homebuyers.

The U.S. banking system is "dramatically more stable" because of the government bailout. Just one year ago (2008), economic activity came to a standstill as major financial institutions shut down due to lack of liquidity.

Even though 115 banks have failed so far this year (2009), there has been a "dramatic improvement in confidence," with private capital back in the system.

One danger now (Nov 2009) is that bankers will be too conservative and not take enough risk to get adequate capital flowing, especially to small businesses. Obama administration is working to help open up credit to them.

By Aberdeen Asset Management Plc … Nov 2009

The U.S. economy may “relapse” next year (2010) on concern that the government’s rescue efforts may not be sustainable.

What we’re saying right now (Nov 2009) is basically to be cautious because of the possibility of this relapse next year (2010), a W-shaped recovery.

Global equities will have “modest” gains in 2010 compared with this year (2010)/

By Joseph E. Stiglitz … Nov 2009

The U.S. recession is “nowhere near” an end and the economy’s third-quarter 2009 growth rate of 3.5 percent, the first expansion in more than a year, won’t carry into 2010.

While latest figures on gross domestic product are “very good,” the numbers would be “miserable” without stimulus measures enacted by the Obama administration. He urged the U.S. and other countries not to pull back on efforts to shore up economies.

When we look at if workers can get jobs, if they can work full time, if businesses are able to sell goods they produce, in those terms, we are nowhere near the end of recession” in the U.S. The U.S. job market is still “in very bad shape.”

While most economists estimate the recession has ended, the National Bureau of Economic Research is responsible for determining when contractions begin and end. The Cambridge, Massachusetts, organization usually makes its recession pronouncement as long as a year and a half after the fact. The group defines a recession as a “significant” decrease in activity over a sustained period of time. The declines it measures would be visible in gross domestic product, payrolls, production, sales and incomes.

The unemployment rate is likely to go up. Growth won’t be fast enough to bring down the unemployment rate. The growth rate of 3 percent to 3.5 percent needed to create enough jobs for new U.S. labor market entrants was unlikely to be sustained into next year (2010).

It is too early for the U.S. and other countries to begin easing stimulus measures put in place a year ago to avert a financial market meltdown. For the world as a whole, it’s premature to think about exiting stimulus.

Around the world, central banks are paring emergency measures taken at the height of the financial crisis. The record $1.4 trillion budget deficit limits Obama’s options for more aid, Obama’s options for more aid, while Federal Reserve officials try to convince investors that the central bank will exit emergency programs in time to prevent a pickup in inflation.
By The Fed … Nov 2009

U.S. unemployment likely will remain high for the next several years (2009 & Beyond) because the economic recovery won't be strong enough to spur robust hiring.

It warned that rising unemployment could crimp consumers, restraining the recovery. Consumer spending accounts for about 70 percent of economic activity. With such a slow rebound, unemployment could well stay high for several years to come. In other words, US recovery is likely to feel like something well short of good times.

It envisions the shape of the recovery kind of like an "L" with a gradual upward tilt of the base.

Very slow net job gains" may occur "sometime next year (2010)." Troubles in the commercial real estate market and the plight of small businesses also will weigh on the recovery.

Small businesses - which held up reasonably well in the 2001 recession - have been clobbered by the downturn, accounting for about 45 percent of net job losses through the end of 2008.

During the last two economic recoveries, small businesses contributed about one-third of net job growth. But doubted that would be the case this time. That's because many small businesses rely on smaller banks for credit. But troubled commercial real estate loans are concentrated at those banks, hobbling the flow of credit.

The consumer spending is growing, but doubts it will recover its pre-recession vigor "for some time to come."

There is no imminent willingness by businesses to rehire or expand capital expenditures during the recovery. It may be some time before significant job growth occurs and even longer before meaningful declines in the unemployment rate.

Inflation is likely to remain subdued and that the Federal Reserve's current monetary policy is appropriate.

It will take some time to get back on a steady pathway to a pace of growth that will result in significant job creation.

By Warren Buffet … dated Nov 2009

Capitalism is still alive and well despite lingering shocks from the longest, deepest recession since the Great Depression.

The financial panic is behind us. The bottom has come in stocks (Nov 2009). Don't pass on something that's attractive today (Nov 2009).

There were at first reassurances that the U.S. economy had not collapsed. The fundamentals of the system, a marketplace-driven system where US invest in education and a great infrastructure for the long-term, that's continued.

Even in the country's "darkest hour, American businesses were still innovating.

Last fall (2008) was really blindsiding. Still, he did not worry about the overall survival of US economy.

The worst recession since the 1930s may be over, but the recovery isn't expected to be strong enough to stem job losses and get businesses hiring again.

Employers shed a net total of 190,000 jobs in October 2009. It was the 22nd straight month of losses. And the unemployment rate jumped in Oct 2009 to 10.2 percent, a 26-year high.

Only the government could have saved things after the collapse of Lehman Brothers triggered a freeze-up in credit markets and panic on Wall Street. In the future, however, there should be more downside to the head of any institution that has to go to the federal government to be saved for reasons of the greater society.

Warren Buffett, perhaps the world's most admired investor, said on Thursday, Nov 12 the financial panic that gripped the globe last year is a thing of the past, even as the U.S. economy's struggles persist, according to Reuters.Nevertheless there is greater opportunity for investments inside the United States than outside, noting that the U.S. economy is far larger than any other.

By CIMB … dated Nov 2009

The US economy grew at a stronger-than-expected 3.5% in the third quarter (3Q2009) may have boosted sentiment, but the question remains if the recovery is sustainable.

US growth would raise exports for regional trading economies like Malaysia and Singapore, but expressed concern on whether US growth was sustainable.

The US’ better than expected growth had come mainly from government-induced spending, including the popular “cash for clunkers” programme and a US$8,000 (RM27,440) tax credit for first-time home buyers. The cash for clunkers programme that ended in August 2009 resulted in 700,000 vehicle sales during the quarter.

Growth was mainly lifted by temporary fiscal measures. This pace of growth is unsustainable given that the fiscal stimulus spending will gradually taper off while household deleveraging and sustained weakness in the labour market will continue to weigh on consumer spending.

Instead, expecting a slow and uneven economic recovery in the US. The financial system is still in recovery mode, households will try to rebuild their savings and fiscal stimulus is tapering off.

In terms of export growth, looking at the US alone was not enough and that a recovery in the European Union (EU) and Japan would have to take place as well for there to be “export strength”.

At present (Nov 2009), it was Asia that was leading the recovery in the global economy, but the region was certainly not decoupled from the G3 economies of the US, EU and Japan.

Economies in the region with large populations such as China, India and Indonesia continued to expand due to their large domestic markets, but trading nations like Malaysia and Singapore relied more on exports.

The Japan Economy …

Japan’s jobless rate unexpectedly retreated in August 2009 from a record and household spending rose as the nation emerged from its worst postwar recession.

The unemployment rate fell to 5.5 percent from 5.7 percent in July 2009. Spending by households unexpectedly rose 2.6 percent from a year earlier, the biggest jump in 19 months.

This is showing the recovery may be sustained: business sentiment rose for a second quarter and industrial production gained for a sixth month.

Economists say the revival is likely to be tepid as companies burdened with excess capacity cut spending and deepening deflation erodes profit.

Labor demand is turning as it is seen in the business confidence surveys, you’re seeing it in manufacturing overtime, and you’re starting to see it now (Oct 2009) in things like the new job offers.

Consumers are realizing that things aren’t as bad as they thought Things will continue to improve, but for consumer spending to become sustainable, a stronger job and wage market is needed.

The number of employed rose by 290,000 from July 2009, the first increase since January 2009. A separate report showed the job-to-applicant ratio, a leading indicator of employment trends, stopped worsening for the first time since January 2008. The ratio stayed at a record low of 0.42, meaning there are only 42 positions for every 100 candidates.

The Bank of Japan’s quarterly Tankan business survey showed confidence among large manufacturers rose for a second straight quarter from a record low of minus 58 in March 2009. The index gained to minus 33 from minus 48, still a level on a par with the previous recession in 2001.

That survey also showed big companies plan to cut spending at a faster pace than they anticipated three months ago and forecast profits will drop 22 percent in the year ending March. While labor demand improved from the previous Tankan, large manufacturers still reported having too many employees.

Some economists say the unemployment rate probably hasn’t peaked, as companies including Japan Airlines Corp. cut jobs even as the economy recovers.

Fifteen months of wage declines are also likely to discourage consumers from spending.

Meanwhile Japan's central bank will stop buying corporate debt in December 2009, ending some of the emergency credit measures implemented earlier this year (2009) as it battled recession, plunging markets and a lending freeze.

It also kept its key interest rate unchanged at 0.1 percent as widely expected. The decision by the Bank of Japan policy board was unanimous amid weak domestic demand and falling prices in the world's No. 2 economy.

Citing stabilization of financial markets, the central bank voted 7-1 to end its purchases of corporate bonds and commercial paper as scheduled in December 2009 However, it extended a special low-interest loan program until the end of March 2010 and will continue accepting corporate debt as collateral until the end of 2010.

Japan's financial environment, with some lingering severity, has been increasingly showing signs of improvement, particularly in the CP and corporate bond markets.

Indeed, the worst of the global financial crisis appears to have passed, with companies indicating that they no longer face a severe credit crunch.

Although the Bank of Japan is starting to phase out its unconventional steps, it is unlikely to shift its super-low interest rate strategy anytime soon.

Despite an emerging recovery in exports, demand at home is lackluster and the job market remains weak. Prices are falling as a result, with the nation's core consumer price index down 2.3 percent in September 2009 from the previous year.

Deflation, which plagued Japan during its so-called "lost decade" of the 1990s, can hamper growth by depressing company profits and causing consumers to postpone purchases. This can lead to production and wage cuts, as well as increase debt burdens.

The bottom line of the BOJ's policy is that, while ending the unconventional measures which reflect the recovery of markets is a rather technical issue, the BOJ will maintain its 'low for long' policy".

The China Economy …

China's economic growth is likely to speed up this quarter (4Q2009), but the government will stay the course on its fiscal stimulus and loose monetary policy (Nov 2009).

Despite the emphasis on policy continuity, an unmistakeable shift towards greater optimism in China's official rhetoric has led analysts to conclude that Beijing is thinking about how to start unwinding its ultra-loose pro-growth policies.

Vice Premier Li Keqiang said the economy had performed better than expected and its recovery was now (Nov 2009) on solid ground. The pace of growth is quickening quarter by quarter. China is confident and is capable of achieving its full-year economic targets.

The upturn in growth has also put China on track to meet its budget targets after a difficult start to the year (200), giving it the fiscal firepower to continue supporting the economy.

Beijing feels little pressure to tighten policy, central bank vice governor Yi Gang said that China faced no serious inflation threat for the foreseeable future.

Our near-term policy will focus on preventing deflation, but should also have a balanced policy and adopt a forward-looking view. Expecting consumer price inflation to turn positive on a yearly basis this quarter (4Q2009) after eight straight months in negative territory.

Investors too had regained confidence as listed companies' results improved.

Some analysts have warned that China's loose policies could fuel asset bubbles and damage the broader economy.

China set itself a goal this year (2009) of 8 percent growth, which officials see as the minimum needed to maintain social stability, and there is little doubt that it will hit that mark. GDP growth accelerated to 8.9 percent last quarter 3Q2009), compared with a year earlier, from 7.9 percent in the April-June 2009 quarter.

Noting that the road ahead (Nov 2009 & Beyond) was still strewn with obstacles. the government would continue the "active fiscal and appropriately loose monetary policies" it adopted late last year (2008) when collapsing exports brought the world economy's woes to China's shores.

Beijing's 4 trillion yuan ($585 billion) stimulus package, complemented by a surge in bank lending, has weighed on the government's books.

Nationwide expenditures were up a more-than-budgeted 24.1 percent in the first nine months from a year (2008) earlier and revenues were up a less-than-budgeted 5.3 percent, casting some doubt on whether Beijing could hit its goal of a 950 billion yuan deficit. It will work out various measures to increase revenues and cut expenditures but will also ensure that the active stimulus measures remain unchanged.

Still, international economic officials said the time was ripe for countries to start making plans. While it is still too early to exit support provided by fiscal and monetary policies, this is an appropriate time to begin the work of planning how China should exit from the deteriorated fiscal positions that have developed as a result of, and in response to, the crisis.
China was in better shape because it entered the crisis with a fiscal surplus and had designed an ideal stimulus package, speedily ramping up spending. It is front-loaded. Most of it has already been spent. This is different, for example, from the United States' stimulus package, which mostly is more back-loaded, more towards 2010 perhaps, even 2011.

Think-tank, backed the view that Beijing should be ready to tweak policy to nip the threat of inflationn in the bud -- even though consumer prices are still falling year on year. If money supply continues to grow rapidly, China will again face the danger of inflation by the end of the second quarter next year (2010).